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RUCPDOC/USDOC WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7841

UNCLAS SECTION 01 OF 07 SHANGHAI 000446 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, CA/VO-MEYERH, EEB/CIP 
STATE PASS USTR FOR STRATFORD/WINTER/KATZ 
USDOC FOR ITA - DAS KASOFF, DAS AGUEVARA, NMELCHER, HMARANO, 
IHILL 
TREASURY FOR OASIA-CUSHMAN, WINSHIP, HAARSAGER 
NSC FOR LOI 
 
E.O. 12958: N/A 
TAGS: ECON CVIS PREL BEXP ETRD KIPR CH
SUBJECT: U.S. TRAVEL INDUSTRY CONCERNS ON IMPLEMENTATION OF 
U.S.-CHINA TOURISM MOU 
 
(U) Sensitive but unclassified. Not for dissemination outside 
USG channels; not for Internet distribution. 
 
¶1.  (SBU) Summary:  During August and September 2008 Shanghai 
Commercial Officer visited with executives of several U.S. 
travel and tourism firms active in the China outbound tourism 
market.  Each of the executives expressed concern with recent 
trends in China's outbound tourism to the U.S. subsequent to the 
implementation of the U.S. - China Tourism MOU signed in 
December 2007.  Each of the executives stated that National Tour 
Association-approved inbound operators or receptives in the 
United States are not realizing the benefits of a post-MOU 
increase in Chinese tour groups to the U.S.  The executives 
attributed this to unfair actions on the part of the Chinese 
outbound tourism industry and unapproved actors in the U.S. 
market.  Shanghai Consular Section Chief and NIV head 
acknowledged problems in MOU visa implementation and offered 
suggestions for solutions.  End Summary. 
 
Background 
---------- 
 
¶2.  (SBU) In December 2007 the China National Tourism 
Administration (CNTA) and the U.S. Department of Commerce signed 
The Memorandum of Understanding between the Government of the 
People's Republic of China and the Government of the United 
States of America to Facilitate Outbound Tourist Group Travel 
from China to the United State.  The MOU allowed Chinese leisure 
travelers to travel to the United States in group tours.  China 
had previously not allowed its travel industry to organize or 
promote group leisure tours to the U.S.   U.S. destination 
marketing organizations (DMOs) and travel firms had also been 
prohibited from promoting their states, cities or regions in 
China.  The MOU removed those restrictions. The MOU was 
implemented on June 17, 2008, with an inaugural tour to 
Washington, D.C. led by CNTA Chairman Shao Qiwei. 
 
¶3.  (SBU) Since China's opening up to the outside world 
beginning thirty years ago, China has had a special policy to 
control and monitor outbound tourism, its Approved Destination 
Status (ADS) system.  China negotiated bilateral ADS agreements 
with other governments to allow Chinese tour operators to 
organize tours to the counterpart country while the counterpart 
government allowed Chinese tourists to travel into its territory 
with a special group ADS visa.  As of 2008 China has ADS 
agreements with over 100 nations. The ADS system allows China to 
manage and monitor the flow of outbound tourism and hard 
currency.  China controls the flow by two means: 
 
*       Chinese tour operators are not allowed to organize or 
promote group leisure tours to foreign destinations unless that 
destination country has signed an ADS agreement with China 
*       Foreign tour operators are not allowed to promote their 
services in China or open a representative office in China 
unless their country has an ADS agreement with China. 
 
¶4.  (SBU) Nonetheless, China and the U.S. were able to negotiate 
a unique tourism agreement as embodied in the 2007 MOU.  While 
the agreement includes some aspects of the standard ADS 
agreement, it is not an ADS agreement and does not commit the 
U.S. to issuing group visas to Chinese citizens.  The media and 
tourism industries both inside and outside of China often, 
erroneously, refer to the MOU as an ADS agreement. 
 
¶5.  (SBU) Another aspect of the ADS system that the U.S. was 
unwilling to accept was China's insistence that the counterpart 
country designate certain travel firms within its territory that 
would be allowed to accept ADS tours from China.  Government 
selection of only certain firms to benefit from the tour 
business, while common practice in China, is contrary to the 
free market principles of the U.S. 
 
¶6.  (SBU) The negotiators settled upon a unique solution to 
China's desire to limit the inbound operators in the U.S. that 
could accept Chinese tour groups. The U.S. Department of 
 
SHANGHAI 00000446  002 OF 007 
 
 
Commerce would accept applications from travel organizations in 
the U.S. that were interested in vetting their membership for 
those firms capable of servicing Chinese tour groups.  The first 
successful applicant, the National Tour Association (NTA), 
agreed to create a list of member firms willing to meet certain 
criteria  such as on-staff Mandarin-speaking tour guides.  The 
resulting list of firms is known commonly as the "NTA's approved 
list."  Chinese outbound tour operators are required in the 
agreement to work with U.S. inbound tour operators and firms on 
this NTA list. 
 
¶7.  (U) On the China side the key regulator for tourism services 
is the China National Tourism Administration (CNTA), the Chinese 
government authority responsible for the development and 
regulation of tourism in the country. CNTA does not have the 
authority of a full department within the Chinese government but 
in other respects acts as a ministry. Provincial CNTA offices in 
each Chinese province report to the central CNTA in Beijing. 
CNTA has several overseas offices called CNTO (China National 
Tourism Offices) that are charged with promoting tourism to 
China.  CNTA is unique as a tourism promotion agency in that it 
is also responsible for controlling the outflow of tourists from 
China abroad. 
 
¶8.  (U) CNTA licenses Chinese travel agencies to operate in up 
to three categories; Class 1: outbound international; Class 2: 
inbound international and Class 3: domestic only.  Approximately 
800 travel agencies in China have a Class 1 license and are 
legally able to offer outbound tours. 
 
¶9.  (SBU) Licenses to operate outbound travel agencies in China 
are so difficult to obtain that the license is itself a 
commodity.  Some people obtain a license through connections and 
then rent out their "regional travel departments" to others who 
actually carry on the travel business.  Some of the largest 
players in the Chinese outbound travel industry therefore don't 
show up on the CNTA's list of licensed travel agencies.  In 
Chinese they are known as heima or "black horses" - the real 
players behind the scene. 
 
 
Tourism from China to the United States 
--------------------------------------- 
 
¶10.  (U) As envisioned by the United States, the Tourism MOU was 
designed to open up the Chinese outbound travel market to the 
U.S. travel industry and boost the numbers of Chinese tourists 
visiting the U.S.  The U.S. Department of Commerce's Office of 
Travel and Tourism Industries reports that January to June 2008 
year-to-date arrivals from China (including Hong Kong) grew 33 
percent to 305,654.  According to the UN World Tourism 
Organization (UNWTO), China is the fastest growing travel market 
in the world.  By 2020, China will become the world's fourth 
largest source of tourists.  The U.S. Department of Commerce 
estimates that Chinese visitors to the United States will reach 
579,000 by 2011.  On average, Chinese citizens spend more during 
their stay than visitors from most countries.  In 2006, the 
average per visitor spending by Chinese citizens traveling to 
the United States was more than $6,000.  Travel and tourism is 
the top service export for the United States and has produced a 
travel balance of trade surplus since 1989. 
 
U.S. Inbound Operators Report No Increase in Tourists from China 
--------------------------------------------- ------------------- 
 
¶11.  (SBU) Commercial Officer spoke with seven U.S. inbound 
operators on the new NTA-approved list.  Every one of the 
operators reported that they are yet to see any new business 
from China in 2008.  One agency head reported that the one 
Chinese agency he had spoken to demanded 90-days credit - 
unusual terms in an industry where consumers pay in advance for 
the travel package. 
 
¶12.  (SBU) Three Los Angeles travel agencies with long histories 
in the Chinese-language tour market reported no increase in 
 
SHANGHAI 00000446  003 OF 007 
 
 
clients from China over last year's numbers.  One reported that 
they are focusing on tour groups from the USA going to China 
because of problems getting visas for their China clients. 
 
NTA-Approved Receptive Services Being Cherry-picked 
by Chinese Travel Agencies 
--------------------------------------------- ------ 
¶13.  (SBU) One large American-owned travel firm in Hong Kong 
reported that since June 2008 they have been approached by a 
number of Chinese outbound tour operators with requests for 
quotes on only the hotel and transportation portions of 
standardized tour itineraries.  The Chinese indicated that they 
were providing the tour guides and interpreters themselves.  The 
American firm has been unwilling to quote for only cherry-picked 
portions of these tour packages because their understanding is 
that NTA-approved inbound operators such as themselves are 
responsible for the entire inbound tour package and thus for 
anything that goes wrong with the tour.  Without being in 
control of the inbound package in its entirety the American firm 
feels they run the risk of violating the terms of the MOU and of 
losing their NTA-approved status.  Other U.S. tour agencies 
Commercial Officer spoke with confirmed that they have been 
approached in the same manner.  Some declined to quote because 
they believed it would violate the MOU.  Others quoted but 
failed to get the business because their prices were too high. 
 
 
Unlicensed Chinese Outbound Operators Bypassing CNTA Licensing 
System 
--------------------------------------------- ------------------ 
¶14.  (SBU) Sources within the Chinese travel industry as well as 
the Consular Section in Shanghai report that Chinese travel 
agencies not licensed by the China National Tourism 
Administration (CNTA) for outbound sales are going through 
CNTA-licensed outbound operators to make Group Leisure Travel 
(GLT) appointments at U.S. Consular Sections in China.  The 
licensed operators charge the unlicensed operators a fee for 
providing this service.  This is similar to the common practice 
in China of licensed travel agencies illegally subleasing their 
license out to one or more unlicensed agencies. 
 
¶15.  (SBU) Although the unlicensed agencies are allowed to book 
their tour groups into the general group interview slots the 
agencies prefer the GLT slots because there is a perception 
among the Chinese agencies that the GLT slots are expedited, 
prestigious and more likely to result in approvals.  However, 
records in Shanghai Consular indicate that approval percentages 
are actually higher during the general group interview slots. 
 
¶16.  (SBU) According to China's regulations, U.S. and other 
foreign travel agencies are not allowed to offer outbound travel 
services to Chinese citizens.  This outbound business is 
reserved only for Chinese travel agencies licensed by CNTA. 
However, foreign travel agencies have skirted these Chinese 
restrictions on foreign firms by arranging partnerships with 
licensed Chinese agencies. 
 
 
Consular Services Facilitation of Group Tours and 
MOU Implementation 
--------------------------------------------- ---- 
¶17.  (SBU) Contrary to perceptions among most Chinese travel 
agents and citizens, U.S. Consular Service offices in China were 
facilitating group travel to the United States long before the 
December 2007 Tourism MOU was signed.  While visa applicants 
have always had to qualify on an individual basis, Consular 
Services has long set aside General Group Interview slots for 
groups, including tour groups. 
 
¶18.  (SBU) After the MOU was signed in 2007 Consular Affairs in 
China created an additional category of interview slots known as 
Group Leisure Travel (GLT) slots.  These were set aside 
exclusively for CNTA-licensed outbound travel agencies and 
operators.  However, the Consular Section in Shanghai reports 
that fewer than 50 percent of the GLT slots have been utilized 
 
SHANGHAI 00000446  004 OF 007 
 
 
to date and plans are to cut back on the number of GLT interview 
slots.  The Consular Section in Beijing also reported 
under-utilization of GLT slots. 
 
¶19.  (SBU) Consular Shanghai reports that Chinese travel 
agencies not on the CNTA-approved outbound operator list can 
continue to book their tour groups into the General Interview 
slots.  Consular Shanghai reports that in August 2008 they 
processed 16,000 visa cases and issued 13,000 visas, refusing 
2300 (about 16 percent).  Shanghai also reports that they are 
issuing about 90 percent of visa applicants once pending 
documentation and/or re-interviews are taken into consideration. 
Shanghai has the highest rate of visa issuance among posts in 
China. 
 
¶20.  (SBU) Consular Shanghai reports that non-CNTA-approved 
travel agencies using the General Interview slots have a higher 
visa issuance success rate (90 percent) than do the 
CNTA-approved agencies (80 percent) using the GLT slots.  In 
August there were 300 interviews in the GLT category and about 
2000 in the General Group Interview category. 
 
Large Deposits Required by Chinese Travel Agencies Impede Travel 
--------------------------------------------- ------------------- 
¶21.  (SBU) In practice, almost all Chinese travel agencies 
require large monetary deposits from their clients before they 
can begin their overseas trip.  The deposit is returned to them 
upon their return to China.  Deposit amounts vary by 
destination.  Travelers must deposit around US$7,000 for 
Australia, US$7,000-14,000 for Europe and US$14,000-21,000 for 
travel to the USA.  Clients need to deposit cash 5-15 days in 
advance of their travel day or 10 days in advance for a bank 
check.  The tourist can collect the deposit with the receipt and 
passport one week after returning to China. 
 
¶22.  (SBU) Commercial Officer has been told by several Chinese 
travelers that they were under the impression that the deposits 
were required by the visa-issuing embassies and consulates. In 
reality, the large deposits are demanded by the travel agencies 
both as an incentive for the traveler to return and as a large 
revolving fund that travel agencies can use to earn interest at 
banks or use to play the stock market.  Since the travel 
agencies handle the visa applications for their clients the 
deposit is also used to discourage clients from canceling their 
tour or switching to another agency after they get their visa. 
 
¶23.  (SBU) The controversial deposits are a frequent topic on 
Internet chat rooms in China.  Tourists are very unhappy with 
the deposits but it is an invisible rule among outbound travel 
agencies and there seems little that the consumers can do.  One 
Chinese agency that advertised that no deposit was required 
found their shop windows smashed.  China has no law governing 
tour deposits.  CNTA authorities know this is a problem but have 
done nothing to change the situation. 
 
Inbound Market in California Dominated by Brokers and Shops 
--------------------------------------------- -------------- 
¶24.  (SBU) According to "ABC," the American-owned travel firm in 
Hong Kong, many Chinese outbound operators are bypassing the NTA 
Approved List and contracting directly with new entrants into 
the U.S. tourism industry - China-based tour brokers and 
shopping firms in California and elsewhere.  The shopping firms 
in turn contract with hotels, bus companies and other suppliers. 
 ABC's investigation of the market found that these shopping 
firms operate without indemnities, insurance, and other 
safeguards that are required by U.S. law. 
 
¶25.  (SBU) The Chinese outbound tour operator with a tour group 
in hand will go to the Chinese tour broker or inbound receptive 
agency which in turn shops the tour group around to the shopping 
firms (shops).  The shop that will offer the cheapest price will 
be awarded the business.  Shops make bids based on a "per head" 
basis - the average rate per head in Los Angeles is currently 
$60 per-head.  The shop then contracts the hotel, bus and tour 
guide.  This amounts to an outsourcing of the entire receptive 
 
SHANGHAI 00000446  005 OF 007 
 
 
agency function.  The receptive agency has essentially become a 
broker taking the spread between what the Chinese outbound 
operator offers them (about $70 per head) and what the shops 
offer them ($60 per head) for the tour group. 
 
¶26.  (SBU) ABC went to a number of the shops in Southern 
California and found that they were located off of the main 
streets in industrial and residential areas.  Signage was absent 
or low-key and in many cases it was not apparent from the 
exterior that the buildings housed shops.  The tour buses 
typically parked some distance from the shops.  Once inside, the 
American travel executive discovered that the shops were stocked 
almost exclusively with pirated and knockoff products.  This 
included famous brand shirts with a "made in USA" label sewn in, 
replica basketball uniforms, luxury brand watches and cosmetics, 
all obvious fakes to the trained eye according to ABC.  Some 
legitimate but mass-market brand cosmetics and vitamins were 
being sold at highly inflated prices (up to ten times normal 
price). 
 
¶27.  (SBU) This practice mimics a common practice among tour 
agencies in China where tours are often comprised of repeated 
stops at stores where the tour operator receives a kickback for 
a percentage of goods purchased by their tour guests. 
 
¶28.  (SBU) The result of turning ultimate responsibility for the 
tour group over to these shops is that the tourists spend much 
of their time being herded into secluded shops where they are 
encouraged, sometimes pressured, into buying overpriced 
knockoffs instead of enjoying the tour of the United States they 
thought they were buying.  The Chinese tourists victimized by 
this system are not having a quality experience and are probably 
returning to China with a very sub-optimal impression of the 
United States. 
 
¶29.  (SBU) This system bypasses much of the legitimate U.S. 
tourism industry and contributes little to the industry's 
prosperity.  As a result, the new jobs and revenue the U.S. 
industry thought it was getting with the MOU have instead flowed 
back to China. 
 
¶30.  (SBU) According to ABC's investigation the bus providers 
hired by these brokers are often unlicensed and uninsured.  ABC 
also claims to have found that some of the bus drivers come with 
the tour group from China and serve as both (unlicensed) bus 
driver and tour guide.  The cost of using an unlicensed driver 
from China is one-fifth the cost of using a licensed American 
driver.  NTA-approved operators that observe the laws cannot 
compete with such illegal practices. 
 
¶31.  (SBU) This situation is not unique to the United States. 
Australia, Hong Kong, Southeast Asia and European countries that 
previously won ADS status have experienced similar problems. 
Many outbound travel agencies in China and their inbound 
partners offer low budget or even "zero-dollar" tour packages to 
Chinese tour groups and recoup losses by leading the tours to 
numerous shops from which they receive kickbacks or commissions. 
 
¶32.  (SBU) The abuse of the ADS system by Chinese outbound 
operators led Australia to overhaul their system in 2005 to stop 
Zero-Dollar practices.  Only outbound and inbound tour operators 
who adhere to a strict Code of Business Standards and Ethics 
have access to the Australian ADS visa processing system. 
 
NTA Approved List Not Being Disseminated by CNTA in Timely Manner 
--------------------------------------------- ------------- 
¶33.  (SBU) On August 22, Commercial Service (CS) Shanghai was 
contacted by NTA regarding complaints from some of their 
approved inbound operators that their firms had not yet been 
placed on CNTA's website listing of approved U.S. inbound 
operators. 
 
¶34.  (SBU) CS Shanghai suggested that NTA maintain a real-time 
list on the NTA website and ask CNTA to place a link on their 
website to the list on NTA's website - thus allowing NTA to 
 
SHANGHAI 00000446  006 OF 007 
 
 
provide a timely list to Chinese outbound operators.  At NTA's 
request CS Shanghai contacted CNTA about the idea but were 
informed that such a simple solution would need to be formally 
incorporated into the MOU agreement.  CNTA pointed out that the 
current agreement only called for list updates every six months. 
 The most recent, un-dated list of U.S. approved inbound 
operators can be found on the CNTA website at: 
http://zhuanti.cnta.gov.cn/cjy/index.asp 
 
Consumer Education and the Chinese Tourist 
------------------------------------------ 
 
¶35.  (SBU) The American travel agencies interviewed agreed that 
no one is forcing consumers in China to buy the low-budget or 
"zero-dollar" shopping tours but they all pointed out that 
Chinese consumers do not realize that they are buying tours 
without insurance and licensed drivers.  They do not realize 
that they will be booked into hotels far from tourist 
attractions or that they will be forced to spend an inordinate 
amount of time in outlying shops that are not part of the 
American mainstream.  As one Hawaii-based U.S. inbound operator 
with significant experience in China reported, "most of the 
Chinese retail tour agencies do not have experience selling 
tours into the U.S. market and those that do understand what's 
going on are more interested in quick turnover than in 
generating repeat business with satisfied customers." 
 
¶36.  (SBU) China is still an emerging market and Chinese travel 
agencies have limited travel products to offer clients.  The 
agencies are further constrained by a lack of international 
knowledge, experience and budget.  This has also lead to an 
absence of niche products and customized itineraries.  This, in 
conjunction with the practices discussed here, may result in 
first-time Chinese tourists receiving a misleading picture of 
America. 
 
Legitimate U.S. Travel Firms Cannot Compete 
------------------------------------------- 
¶37.  (SBU) ABC and others have complained that contrary to 
expectations, the MOU has placed U.S. companies at a 
disadvantage in their own market.  They also express concern 
that both governments are failing to police the agreement. 
 
¶38.  (SBU) On the Chinese side the CNTA is not policing the 
ranks of travel agencies in China to stop unlicensed outbound 
operators from organizing tours abroad.  Neither is there 
evidence that CNTA is cracking down on the common practice of 
licensed travel agencies subleasing their licenses to unlicensed 
agencies that are in turn not held accountable for their often 
questionable practices. 
 
¶39.  (SBU) On the U.S. side there are jurisdictional gaps which 
allow the illegal operations to slip through cracks in 
enforcement.  No federal agency is explicitly responsible for 
enforcing the provisions of the MOU.  Once a State Department 
Consular Officer issues the visa, MOU enforcement becomes a 
question of domestic U.S. enforcement of immigration, IPR and 
civil laws. 
 
¶40.  (SBU) The Shanghai Consular Section has also pointed out 
another enforcement flaw.  Prior to the signing of the MOU, 
travel agencies in mainland China were NOT able to advertise 
about tourism to the United States, nor officially organize 
groups.  Government agencies were thus better able to police and 
monitor infractions.  However, with a growing list of approved 
mainland China agencies able to now "advertise" U.S. tourism 
packages, enforcement of advertising and organizing by 
non-authorized travel agencies is lacking.  In addition, small 
unauthorized travel agencies and authorized agencies have 
increased their advertising in the local media, which is 
generating more and more interest among Chinese travelers. 
Unauthorized GLT agencies are assisted by authorized agencies to 
make appointments as "GLT Participants" OR just assisting the 
traveler to make an appointment as a general B1/B2 traveler. 
The Consular Section in Shanghai has seen a large increase in 
 
SHANGHAI 00000446  007 OF 007 
 
 
people going to the United States for tourism in the Non-GLT 
appointment category. 
 
Possible Solutions 
------------------ 
¶41.  (SBU) There are a number of possible solutions that could 
be implemented to address these problems. 
 
--  Require Chinese outbound tour operators making group 
appointments at Consular Offices in China to submit a form or 
statement from an NTA-approved American inbound operator that is 
handling the inbound Chinese tour group in accordance with the 
MOU. 
 
--  NTA could establish a liaison with California and other 
state and city commerce licensing units and a mechanism for 
reporting the locations of unlicensed shops selling counterfeit 
goods to tour groups.  No one knows where these shops are any 
better than the NTA-approved inbound operators that have to 
compete with them. 
 
--  Embassy and Consulate Commercial Sections could organize or 
facilitate consumer education exhibits and events at travel and 
tourism trade shows in China.  The objective would be to inform 
consumers of the desirability of booking legitimate tours that 
provide licensed, insured transportation and quality services. 
 
--  Development of a "single pipeline" system for making 
appointments and submitting visa applications for the GLT 
appointment category, allowing vetting on who is, and who is 
not, authorized to use the special travel channel.  According to 
the Shanghai Consular Section, this would be similar to a system 
they already use for local Foreign Affairs Offices, as well as 
the American Chamber of Commerce.  The single pipeline operator 
could be CNTA-authorized or an American firm operating the 
pipeline in a way that could benefit the U.S. industry as well 
as level the playing field among Chinese travel agencies. 
CAMP